Bank Balance

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One of the causes of the financial crisis was lax regulation of banks. The internationally agreed rules allowed banks to hold too thin a cushion of capital to absorb losses on their loans. The response of regulators has rightly been to toughen up the rules and force the banks to increase their capital buffers. It is essential, however, that the screw is not tightened too quickly.

In an ideal regulatory system, the capital rules would vary according to the economic cycle. During an upswing banks should be forced to hold more capital, discouraging them from more lending so reducing the